Article: Flash Crashes, Algo Manipulation & Demystifying Market Abuse Regulation

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Flash Crashes, Algo Manipulation & Demystifying Market Abuse Regulation

Roger Aitken, 26 May 2016

It’s conjecture as to when the next flash crash might occur. But with the EU Market Abuse Regulation (MAR) coming into force on 3 July 2016, investment firms and operators of trading venues are heading for yet another regulatory change. As if there were not enough regulations and red tape confronting firms from a slew of edicts from Brussels and elsewhere in other jurisdictions.

One could reel off regulatory acronyms such as MiFIR, REMIT to counter market abuse in the energy markets and MAD to name a few. This time though it is with a focus of manipulation of algorithms being labelled as ‘market abuse’.

Driving the latest regulation on top of the welter of others is a need to establish a more uniform and stronger framework in order to preserve market integrity, to avoid potential regulatory arbitrage as well as to ensure accountability in the event of attempted manipulation. Add in providing more legal certainty and – in the view of the legislators – less regulatory complexity for market participants and compliance officers have their hands full.

But are firms ready, are they compliant and have they invested sufficiently in testing their trading systems? Some institutions that have not will have to step up to the plate or face consequences in the shape of fines and potential prison sentences.

With many under scrutiny concentrating heavily on the impending Markets In Financial Instruments Directive (MiFID) II deadline, “the full implications of MAR could have slipped under the radar despite its compliance requirements being even heavier” argues Eddie Thorn, Director of Capital Markets at SQS, a specialist firm in the software quality space listed on the Deutsche Boerse with a primary listing on the London Stock Exchange’s AIM segment.

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